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Original Risk: A Society for Change Agents

Alternative reinsurance capital can narrow protection gap: Swiss Re


According to an interview with global reinsurer Swiss Re’s CEO, alternative reinsurance capital is not something to be feared for the company, rather it is an essential source of capacity to help provide insurance and reinsurance for the world’s uninsured risks.

Swiss Re logoReuters’ interview with Swiss Re CEO Michel M. Liès discusses the current state of the reinsurance market, the trajectory of reinsurance pricing and the influence of alternative capital and insurance-linked securities (ILS) on the broader market.

As we wrote recently, Liès recent comments during the revealing of Swiss Re’s first-half results were focused on the fact that, despite the challenges reinsurers face, there are a significant number of opportunities in the world that reinsurance capital can help to address.

Liès and Swiss Re see the huge pool of potential risk capital that could be provided by institutional investors, insurance-linked asset managers and other alternative capital sources, as an essential tool to help to cover the 75% of risks in the world that are uninsured.

It’s encouraging to hear, as the original reason that the capital markets were first tapped directly with catastrophe bonds, cat options and swaps, was that the re/insurance market felt it needed access to the deepest and most liquid pool of capital in order to cover the peak catastrophe risk exposures.

That developed quickly into the early stages of reinsurance as an asset class, as the first ILS investment managers emerged and began to marshal investor capital towards these risks. As investors gained an appreciation for the direct returns of insurance and catastrophe risk, the market grew and now we find ourselves with around $70 billion to play with.

But that’s still small change, in the grand scheme of the world’s uninsured risks.

If global reinsurance capacity if a few hundred billion in size, with ILS and collateralized capacity as much as 15% or more, depending on what numbers you look at, this is still only covering the 25% of risks that are currently insured around the world.

For global reinsurance firms like Swiss Re, which have been feeling the pressure as alternative capital and ILS competes for the risks it would traditionally have called a staple of its annual underwriting, there is a huge opportunity to help to marshal capital markets capacity towards the other 75% of uninsured risks.

The expertise that Swiss Re and it’s peers can offer to open up new markets and opportunities, while leveraging the efficient and low-cost capital from ILS funds and institutional investors alongside their own capacity, could help to expand insurance penetration more rapidly than either traditional or alternative could do alone.

In fact the partnering of traditional reinsurance firm origination, modelling, analytics, underwriting and risk controls, alongside the capital market’s structuring, portfolio management approach, own modelling and analytics and efficient pool of risk capital, could be the source of the next phase of insurance and reinsurance market growth.

It will take a brave CEO to go all-out and stake a reinsurance companies future prospects on partnering with alternative sources of capital. It may even take a rethink of how the insurance and reinsurance company structure itself works.

But the potential benefits, to both the reinsurer in search of opportunities in a difficult market, as well as to the investors providing the capital who are keen to access more insurance risk, could be huge.

While the benefits to the world, of cheaper, more efficient risk capital, wielded by global reinsurers partnering with the capital markets, could be the best chance we have of accelerating the narrowing of the protection gap.

Also read:

Don’t lose sight of the many opportunities in reinsurance: Swiss Re CEO.

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